I am a securities law attorney at Wiand Guerra King in Tampa, Florida, where my practice includes complex commercial litigation and regulatory matters, with a focus on securities and financial services litigation. I am also part of the team representing the court-appointed receiver of Arthur Nadel's $400 million Ponzi scheme, and have particular expertise in the area of Ponzi schemes. In addition to my law degree, I also hold a Masters in Business Administration from the University of Miami. In my spare time, I also publish the Ponzitracker blog, which tracks the proliferation of Ponzi schemes both nationally and internationally. Feel free to follow on Twitter at @Ponzitracker. All opinions expressed are solely that of the Author. This blog is not intended, nor should it be construed, as legal advice.

Feds Halt Alleged $600 Million ZeekRewards Ponzi Scheme: How It Happened And What's Next

On Friday, August 17, 2012, the Securities and Exchange Commission (“SEC”) filed an emergency action in a North Carolina federal court, alleging that ZeekRewards and its founder, Paul R. Burks, were involved in one of

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the largest Ponzi schemes in history. The move came as many began to question the legality of the operation and whether its promised 1.5% daily returns were simply ‘too good to be true.’ These fears were confirmed on Friday, with the unavailability of Zeek’s website and the closure of its Lexington, N.C. headquarters serving as an ominous sign leading up to the SEC’s announcement Friday evening that it had halted the scheme as it teetered on the “verge of collapse”. The sheer number of victims, which authorities estimate tops 1 million, likely earns Zeek the infamous distinction as the largest Ponzi scheme in history by the number of investors, and will add a layer of complexity never seen before in trying to unravel the scheme and distribute funds to investors. For sake of comparison,the number of investors in Bernard Madoff’s $65 billion Ponzi scheme, the largest in history by investor losses, was “only” in the thousands.

According to authorities, Zeek consisted of two related operations, Zeek Rewards and Zeekler. Zeekler was an international penny auction website that offered users the ability to win merchandise by placing one-cent “bids”. Zeek Rewards was the investment arm of the operation, offering users the ability to share in up to 50% of daily “profits” by completing a daily set of tasks that included soliciting new customers and selling or giving away “bids” to new users. At the end of the day, users were paid “Profit Points” usually totaling 1.5% of their investment, and were given the choice either to receive their “profits” in cash or rollover the points to compound future returns. Many chose to re-invest, and due to the compounding nature of the Profit Points and the steady stream of new customers, authorities allege that the number of outstanding Profit Points was nearly 3 billion at the time the scheme was halted. The scheme depended on investors choosing to reinvest their profits, for according to the SEC, Zeek would have been insolvent in a matter of weeks, if not days, had investors chosen to receive their profits in cash.

No doubt in efforts to avoid the scrutiny of federal and state authorities, Zeek made it mandatory for new users to acknowledge that they “are NOT purchasing stock or any other form of ‘investment’ or equity” before becoming a member. While Zeek dubbed the operation as an “e-commerce subscription”, the SEC disagreed, charging that, in reality, the company was engaging in the fraudulent offering of unregistered securities.

In its announcement, the SEC also stated that Paul Burks, Zeek’s founder, was cooperating with authorities and had agreed to pay a $4 million civil penalty and relinquish all interests and assets in the company – all without admitting or denying any culpability. Burks cooperation should be seen as a positive sign for investors, as his knowledge of the scheme will significantly help authorities unravel the operation and account for all assets. According to the SEC, Zeek has paid over $375 million to investors to date, and currently holds approximately $225 million in investor funds in financial institutions all over the world. These funds were frozen in an emergency asset freeze granted by the North Carolina federal court, meaning that they cannot be dissipated or misappropriated during the course of the investigation.

Zeek and its affiliates have attracted scrutiny in recent weeks as investors increasingly began to doubt the operation’s legitimacy. According to David Dalrymple, President of the Winston Salem Better Business Bureau (“BBB”), the BBB had been receiving complaints for some time, and within the last 30 days alone had received 30,000 inquiries about Zeek. Said Dalrymple, “In twelve years as the President here, I cannot compare that to any level of inquiry for any other business. Ever.” Dalrymple stated that the BBB’s analysis of Zeek had raised many red flags, and that it immediately notified criminal authorities.

While investor losses pale in comparison to those experienced by Madoff or Stanford investors, the sheer number of Zeek investors is on a magnitude that has never been dealt with before in a receivership or bankruptcy context. To illustrate, assuming Zeek had one million investors, a simple 1-page summary for each investor summarizing contributions and withdrawals, stacked together, would be 101.3 meters high, or roughly 300 feet. The staggering number of victims suggests that investigation of the fraud and establishment of a distribution process will likely be a drawn-out process involving hundreds, if not thousands, of people.

Going forward, the first step will be the appointment of a receiver by the North Carolina federal court. In an Order filed late Friday, United States District Judge Graham Mullen appointed Kenneth Bell as the temporary receiver, empowering him to take control of Zeek’s assets and begin an investigation. Mr. Bell is a Partner at the Charlotte office of McGuireWoods, where his practice includes white collar crime. It is likely that Bell took control of Zeek’s offices yesterday immediately after the Order was signed. In the Order, Judge Mullen also ordered Burks to provide a list of all assets, employees, and creditors of Zeek to the Receiver within 10 days, and a full accounting of assets, bank accounts, and other property within 30 days.

For now, the North Carolina Attorney General has established a hotline for concerned investors at (919) 716-6046.

(08/20) EDIT – Forbes has confirmed that Burks is being represented by Noell Tin of Tin Fulton Walker & Owen, a Charlotte, NC law firm.

(08/21) EDIT – The Receiver has announced the establishment of a Receivership website at www.zeekrewardsreceivership.com. Victims wishing to communicate with the Receiver should email info@zeekrewardsreceivership.com.

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im sure the penny auction made money i won some things on there so did my friends thats why its weird when they SAY that 98% was others investing are they really trying to say that the other 2% is where the membership fees and the penny auction comes in lol ? im sure there are ALOT of Diamond members i know ALOT of them most with low balance such as 22,000 points or so. Interesting story

FYI if any of you cashed out a nice profit from this, you should watch out. Their is something called clawbacks.

No mater how much you deny it, hundreds of thousands of people LOST money from this, and guess what YOU have their money. The government could come knocking on the door and take THEIR money back from you.

As a Zeek Affiliate, I believe this is a false accusation in that The Rex Venture Group was highly attentive to compliance from the start. As affiliates it was made VERY clear throughout all of the information as well as the required compliance course that as affiliates, we had to take within 30 days that this was NOT an investment or an exchange of securities (they were adamant on this over and over and over) but rather a purchase of bids that we would give away to Zeek Penny Auction customers. As a result of doing so and placing one ad a day (as the advertising arm of Zeekrewards, we got to participate in daily profit sharing) and participating in a monthly subscription of approx. $10, $50 or $99. The other factors to consider here are the fact that every 90 days any original bid purchase would retire and there was a set cap on the amount of bids you could purchase. You Like Me I am sure value integrity. The Rex Venture Group’s consideration and requirements addressing compliance and the fact that it was on the front lines of all presentation discussions was in fact what drew me to this income opportunity. In fact ZeekRewars recently increased the compliance requirements and education required of affiliates. I have been told this accusation is a result of very few complaints compared to the 1 million people who are involved. Within an hour, over 50,000 people signed a petition to validate what I am sharing here. Clarity of focus leads to accuracy of response. I am curious as to the concern here in light of these facts and my personal experience with a company that has figured out a way to profit share and help thousands of people get on their feet financially in our economy which is very compromised on many levels. It is my prayer that the truth is revealed in all of the upcoming investigations. I will also say that if a concern is around the thought, “what if everyone pulls out their repurchasing of bids from their daily profit share at the same time?” My response to that is with another question, “What if everyone pulled out of the stock market and the bank system at the same time.” These are thoughts that are worthy of consideration in all of the dealings around these accusations. May the truth prevail.

One more thought worth exploring based on a source that is referenced in this article: The BBB, is a company that is worth investigating in terms of compliance as 20/20 revealed last year that their rating system can be purchased by the company seeking a high rating. I pray that integrity is reinstated into our systems: http://www.youtube.com/watch?v=Yo8kfV9kONw

We can only speculate with the facts and we might not know the real truth about this whole situation. I can tell you that more people got hurt because the federal government got involved and decided to shut down a debt free company that was growing by the minute. I think the reason behind it is the lack of control of that immense cash flow that was about to reach a billion dollars and the government had no control over it. Don’t forget that many of the foreign investors were cashing out and millions of dollars were exiting this country. This investors were not getting taxed by the IRS either. Someone to speculate that if A number of events were about to happen and that would lead to the company’s collapse in the near future is not very convincing to me and is definitely not enough evidence to close down a business that ran successfully for over 18 months. Those VIP points retire, they have to be given to someone to earn more points and that gets hard after you reach those high numbers. Plus the company does not guarantee those earnings and they can be easily capped off by some restrictions which would prevent unlimited withdrawals. Bottom line is that solutions are always available but you have to be given a chance to apply them. So let’s just call this a SCAM and Unauthorized sell of securities and shut it down. So all the future investors “get protected” by screwing all the actual investors. And in the due process huge fines will be paid, the State of NC should make some money, the receiving company will charge all kinds of commissions to distribute the remaining funds back to the investors and that is probably going to take a few years. By that time who knows if even half of those funds would be left to give back! I feel sorry for every one here! And I could be wrong too…

The “actual investors” already cashed out. Remember, 365 million were already paid out. It’s all these late investers that got shafted. Only 225 million or so and whatever property is left in Paul Burk’s possession (or any clawbacks from the top affiliates, who cashed out MILLIONS in the final months).

If you were a Zeek rep, my heart sincerely goes out to you and your family as this is a very tough situation to be in. Please do not loose faith in your ability to make your dreams come true ESPECIALLY during these hard times. Keep in mind, this is simply a bump in the road and that you deserve greatness and will soon find it!

Please know that I am your friend and want to help you…..I want to offer you a FREE Pass into our company.

Please call or message me and we’ll talk…What do you have to lose?

Contact me and I will show you how you can join a leader in Social Commerce. We have fellow Zeek people joining us that will easily make 3 and 4 figure incomes their first month and that is residual, so it will keep growing.

Check us out, and bring your team over. I will be more than happy to send you a recorded webinar, and explain our program to you, My wife and I will personally work with you., and start helping you make money right away..

Besides our generous compensation program, we have Bonus Rewards that will give you FREE IPads, TV’s, Trips, Cars, Boats and more. Again this is a FREE offer, no cost or obligation, just come check us out, YOU WILL BE GLAD YOU DID !! Ken Jefferson 305-407-1960